Oct. 22 (Bloomberg) -- We don’t want to think about it, let
alone read about it, but higher taxes are on the way.

Two tax hikes were passed this year and another is likely.
These new taxes are supposedly being levied just on the rich.
But over time, they will hit most of our kids. And they are just
the beginning of our children’s and grandchildren’s tax trauma,
given Congress’s inability to curb spending.

The two increases are for Medicare. They were buried inside
the 2,000-page health-care bill and take effect in 2013. Earn
more than $250,000 ($200,000 if single) and you’ll face an extra
0.9 percentage-point FICA tax for Social Security. And once your
income passes this level, you’ll pay a 3.4 percent tax on your
asset income.

These thresholds aren’t indexed for inflation, let alone
growth in real incomes. So these taxes on “the rich” will
eventually hit everyone as nominal incomes rise with inflation
and productivity. Within 20 years most earners will be paying
these new Medicare taxes.

The Alternative Minimum Tax also has thresholds that aren’t
indexed for inflation. Congress has raised these levels to keep
the share of taxpayers affected constant. But there is no
guarantee it will continue to do so.

There are two other income-tax thresholds that haven’t
changed since 1984. These are the income levels at which the
first 50 percent and then 85 percent of our Social Security
benefits are subject to taxation. In 2000, only 22 percent of
recipients were above one of these thresholds. Now it’s 39
percent. When today’s children retire, virtually all will pay
taxes on 85 percent of their benefits.

Bye-Bye Tax Cuts

Take a current 10-year-old who reaches the 25 percent tax
bracket. She’ll hand back 21 percent (0.25 times 0.85) of her
Social Security benefit in income taxes. To add injury to
injury, President Barack Obama’s National Commission on Fiscal
Responsibility and Reform likely will recommend a 20 percent
benefit cut through a three-year increase in Social Security’s
full retirement age.

Congress will, surely, also repeal George W. Bush’s income-tax cuts for the rich by raising rates in the top two brackets
to 36 percent from 33 percent and to 39.6 percent from 35
percent. Over time, many of our kids who are middle income and
even low income will face these higher rates because of
real bracket creep.

Based on these assumptions, many young, low earners, now in
the 15 percent bracket, will land in the 25 percent bracket by
2020. And many young workers with moderate earnings, now in the
28 percent bracket, will move into the 36 percent bracket.

What’s the total impact on young and future Americans of
these tax time-bombs?

Kids and Grandkids

Consider two couples -- the kids, who are 30, and the
grandkids, who will be 30 in 2040. The kids earn $70,000 a year
per spouse, own a $400,000 house with a $1,718 monthly mortgage
payment, will spend $30,000 on each of their two children’s four
years of college, and earn 6 percent (3 percent after inflation)
on their assets.

The grandkids are just like the kids except all their
numbers are 3.68 times larger because of inflation and
productivity growth.

Let’s reference by 100 each couple’s sustainable living
standard absent any federal taxes. To compare the kids and the
grandkids, we’ve adjusted the grandkids’ living standard down
for their increased productivity.

Under the current tax system, the kids’ living standard is
83, meaning they face a 17 percent lifetime tax rate. Add in the
new Medicare taxes, and the increase in top tax rates over the
next decade, and their living standard drops to 80 -- a 20
percent tax rate.

Approaching Greece

The grandkids face a bigger hit. Their living standard is
74 -- a 26 percent tax. So, compared with the current tax
system, the grandkids have to pay 9 cents more per dollar earned
to Uncle Sam.

If things continue as we adults have planned, our nation’s
debt, measured as a share of gross domestic product, will reach
Greek levels just when the grandkids start heading to work. At
that point, simply stabilizing the debt-to-GDP ratio will
require raising taxes by 50 percent, thereby lowering the
grandkids’ living standard from 74 to 61.

This is a 39 percent bite, more than twice the lifetime tax
rate that baby boomers have experienced. Bear in mind, this is
an average, not a marginal tax rate; it’s like taxing every
dollar the grandkids earn at 39 percent.

Deficits Keep Soaring

A 50 percent tax hike will work for a while. But, given
projected federal spending, it won’t keep deficits from soaring
down the road. So the great-grandkids can expect even higher
lifetime tax rates than their parents.

We’ve spent six decades passing the generational buck --
taking ever-larger sums from the young and giving them to the
old, while promising the young their turn, when old, to
expropriate their own offspring.

This massive Ponzi scheme is turning the American Dream
into the American Nightmare. Stopping it means dramatically
limiting the growth of federal spending. Here’s how:

-- Scrap our health-care system and provide all citizens
with a voucher based on pre-existing conditions to buy a basic
health plan, and limit coverages so that the total cost of the
vouchers is fixed each year at 10 percent of GDP -- what Germany
now spends on care.

-- Freeze Social Security in place, pay off its accrued
benefits and replace the system with mandatory saving in
personal accounts whose assets are jointly invested, by
computer, not Wall Street, at minimal cost, in a fully
diversified global index fund. The government would match
contributions of the poor to make the system progressive and
annuitize account balances at retirement. This Personal Security
System would take much of Social Security’s unfunded liability
off our kids’ backs.

-- Finally, stop spending more than the next 15 countries
combined on defense. Declare victory in our unwinnable wars and
bring the troops home.

And what about revenue? Scrap the current tax system and
tax the elderly as well as the young through a levy on
consumption. Also, provide a fixed monthly payment to each
household to make the consumption tax progressive.

This all may sound radical. It’s not. Our progeny only have
100 cents out of every dollar they earn to surrender to Uncle
Sam. And if their tax rates get too high, they will have a
simple response: “Hasta la vista, baby.”

(Laurence J. Kotlikoff is a professor of economics at
Boston University and president of Economic Security Planning
Inc., and Richard Munroe is a senior software engineer at the
firm.)